The onslaught from JPMorgan continues, which in the aftermath of first Marko Kolanovic's periodic threats about sudden market crashes, and Mislav Matejka's recurring warnings that BTFD is dead and "not to overstay your welcome in the bounce", earlier today JPM's chief equity strategist Dubravko Lakos-Bujas has officially cut his 2016 year-end S&P500 earnings forecast to $120 from $123 "on stronger US Dollar and lower economic growth forecast" as well as trimming his year end S&500 target from 2,200 to 2,000.
Here are the seven reasons why JPM continues to push the bear case:
The risk-reward for equities is deteriorating. There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology and spills over, negatively impacting investor, consumer and business sentiment, resulting in a lack of risk taking, and eventually creating a negative feedback loop into the real economy. Going forward we see equity risk remaining asymmetric to the downside given:
- rising risk of US earnings recession,
- diverging central bank policies and a Fed that is trying to tighten causing USD to strengthen,
- US manufacturing sector already in recession territory and non-manufacturing sector continuing to decelerate,
- deteriorating macroeconomic backdrop with China posing a significant risk to global markets,
- credit spreads widening and high yield approaching recession levels,
- late cycle dynamics,
- continued elevated volatility likely to impact sentiment—VIX has been averaging ~20 for the last 6 months.
As Dubravko summarizes, "this all makes for an unattractive equity backdrop." Furthermore, just like his peers, the third croat notes that there may be a short-term rebound, it is one that should be sold:
"While in the short term an expected pickup in buyback activity and positive 4Q earnings surprises may provide some support to equities, absent a positive central bank catalyst we see equity risks skewed to the downside over the medium term. We have been highlighting for some time that normalization of US monetary policy could pose a significant risk to equities. If equities get progressively worse with sentiment spilling over into the real economy, the Fed may be forced to pause for a while. This could be a relief to the USD and a positive for equity prices and earnings. However, if the Fed continues to normalize, there is a high degree of risk that equities begin to price in a policy error. Also, this is an election year in the US with partisan debate around a range of issues—tax reform (corporate, personal), fiscal policy (infrastructure, defense programs), healthcare. Depending on election outcome (i.e. far right vs. far left) the implication for US equities and sectors could vary by a wide degree.
All of this puts the Fed's credibility in the crosshairs: the market is already expecting just one rate hike in 2016 vs the Fed's "dot plot" forecast of 4. Just how will Yellen converge the two outlooks without leading to even more volatility?
And then there is the economy: "US economic growth estimate for 2016 GDP has been revised down to 1.8% compared to 2.3% in December, which is a step down from 2.4-2.5% seen over the last two years:"
Which brings us to the conclusion:
We are lowering 2016 S&P 500 EPS to $120 from $123 on stronger US Dollar and lower economic growth forecast. The negative revision to our 2016 EPS estimate is due to the further rise in USD TWI (every 2% increase in USD results in negative earnings revisions of ~1%) and deceleration in US GDP forecast (to 1.8% from 2.3%). Our revised $120 EPS assumes flat sales growth (Street at 3%), flat margins (Street at +6bps) and buybacks contributing ~2% to EPS growth. Risk of earnings recession is rising, with S&P 500 likely to print 2 consecutive years (’15, ‘16e) of flat to negative earnings growth. Additionally, we expect volatility to remain elevated and continue to exert negative pressure on the P/E multiple.
Of course, using a well-known Keynesian strategy, if one only excludes all the negatives, only the great news is left, which may explain what the algos are doing today the stock market today. As for tomorrow, we hope Gartman decides to chase the rebound so the shorting can again resume.